MARGINAL-COST PRICING - ITS ROLE IN CONSERVATION

Marginal-cost analysis is critical to a conservation program because a ll management decisions affecting conservation require a comparison of costs and benefits. Increasing production within existing facilities requires that the revenues derived from the additional sales be compar ed with the higher operations costs. Also, a decision to expand capaci ty requires a comparison between expected revenues and the capital and operations costs of the new facilities. An approach is presented for the design of water rates that combines economic theory with the pract ical aspects of integrated resource planning. Marginal-cost savings ar e compared with changes in discretionary use, resulting in the calcula tion of a conservation surcharge. This surcharge is a strong conservat ion price signal that is relatively easy to administer and that result s in economic efficiency.